Category Archives: 401k

The maximum contribution to 401(k) accounts rises by $500 in 2018, the first increase in three years. If you have not already done so, now is the time to plan for contributions into your retirement accounts in 2018.

Retirement Contribution Limits

Retirement Program

2018

2017

Change

Age 50 or
over catch up

401(k), 403(b), 457 plans

$18,500

$18,000

+$500

add: $6,000

IRA: Roth

$5,500

$5,500

none

add: $1,000

IRA: SIMPLE

$12,500

$12,500

none

add: $3,000

IRA: Traditional

$5,500

$5,500

none

add: $1,000

Social Security

Item

2018

2017

Change

Wages subject to Social Security

$128,700

$127,200

+$1,500

Annual Social Security employee tax: $7,979.40

Average estimated monthly retirement benefit

$1,404

$1,360

+$44

Don’t forget to account for any matching programs offered by your employer as you determine your various funding levels for next year.

There are a lot of new things to get used to when you change jobs, from new responsibilities to adjusting to a new company culture. One thing you may not have considered are the tax issues created when you change jobs. Here are tips to reduce any potential tax problems related to making a job change this coming year.

Don’t forget about in-between pay. It is easy to forget to account for pay received while you’re between jobs. This includes severance and accrued vacation or sick pay from your former employer. It may also include unemployment benefits. All are taxable but may not have had taxes withheld, causing a surprise at tax time.

Adjust your withholdings. A new job requires you to fill out a new Form W-4, which directs your employer how much to withhold from each paycheck. It may not be best to go with the default withholding schedule, which assumes you have been making the salary of your new job all year. You may need to make special adjustments to avoid having too much or too little taken from your paycheck. This is especially true if there is a significant salary change or you have a period of low-or-no income. Luckily, the IRS provides a withholding calculator on its website (IRS Withholding Calculator). Keep in mind you’ll have to fill out a new W-4 in the next year to rebalance your withholding for a full year of your new salary.

Roll over your 401(k). While you can leave your 401(k) in your old employer’s plan, you may wish to roll it over into your new employer’s 401(k) or into an IRA. The best way is to get your retirement funds rolled over directly between investment companies. If you take a direct check, you’ll have to deposit it into the new account within 60 days, or you may be assessed a 10 percent penalty and pay income tax on the withdrawal.

Deduct job-hunting expenses. Tally up your job-seeking expenses. If they and other miscellaneous deductible expenses total more than 2 percent of your adjusted gross income for the year, you can deduct them on an itemized return. This includes things like costs for job-search tools, placement agencies and recruiters, and printing, mailing and travel costs. A couple caveats: you can only use these deductions if your expenses were to search for a job in the same industry as your previous job and you were not reimbursed for them by your new employer.

Deduct moving and home sale expenses. If you moved to take a new job that is at least 50 miles farther from your previous home than your old job was, you can also deduct your moving expenses. There’s another benefit for movers, too. Typically, you can only use the $250,000 capital gain exclusion for home sales if you lived in your primary residence for two of the last five years before you sold it. But there is an exception to the rule if you sold your home to take a new job.

Finding a new job can be an exciting experience, and one that can create tax consequences if not handled correctly. Feel free to call for a discussion of your situation.

Is socking away large sums in a tax-deferred retirement account ever a bad idea? It is when you exceed the annual IRS limits. Whether intentional or not, the penalties can be painful. Here’s how overfunding occurs and what steps to take to fix the problem.

How overfunding happens

Overfunding retirement accounts happens more than you may realize. It can be the result of a job change that causes you to participate in two different employer retirement plans. Sometimes people forget they made IRA contributions early in the year and do it again later. Others forget that the IRA limit is the total of all accounts, not per account. The rules are complicated. Traditional IRAs can’t be contributed to after age 70½, while Roth IRA contributions are subject to income limits. Plus all contributions are predicated on having earned income.

IRAs

The annual Roth and Traditional IRA contribution limit is $5,500 ($6,500 if age 50 or older). If you surpass this amount, you pay a 6 percent penalty on the overpayment every year until it’s corrected, plus a potential 10 percent penalty on the investment income attributed to the overfunded amount.

The fix: If the overfunding is discovered before the filing deadline (plus extensions), you can withdraw the excess and any income earned on the contribution to avoid the 6 percent penalty. You will potentially owe a 10 percent penalty in addition to ordinary income tax on the earnings of the excess contributions if you’re under age 59½. Often you can apply the contribution to the next year. If your issue is due to age (70½ or older for a Traditional IRA) or income limit (for a Roth IRA), consider recharacterizing your contribution from one IRA type to another.

401(k)s

The rules for correcting an overfunded 401(k) are a little more rigid. You have until April 15 to return the funds, period. The nature of the penalty is also different. The excess amount is taxable in the year of the overfunding, plus taxable again when withdrawn. So, you could pay the penalty multiple times on the same amount. And, in certain cases, overfunding a 401(k) could cause it to lose its qualified status.

The fix: If you suspect an overpayment situation, contact your employer as soon as possible. Adjust your contribution amount before the end of the year and try to get the problem resolved that way.